A Look at the Road Ahead, Not the Rear-view Mirror

Andrew Kehoe, Denver based Director of Business Development shares his insights on alternative lender’s role in today’s market

Over the last fifteen years of my finance career, I have been fortunate enough to work alongside some great minds in both conventional banking and the asset based lending (ABL) worlds. During this time, I have noticed a major difference in how each approach their credit review process.

For the majority of commercial and business banks, the underwriting process is fairly homogenized, focusing on the company’s prior performance to determine future credit worthiness. To me, this is a lot like trying to drive a car while solely looking in the rearview mirror. Looking in the rearview mirror may get you to where you want to go, but it only works if you are staying straight on paved roads, like a business with flat growth in a stable economic environment. But it’s also very dangerous.

What happens when you come to twists and turns in the road? Or a steep climb? Or what happens, like we are experiencing with COVID19, when a cliff appears out of nowhere? In these times of rapid or drastic change, the conventional underwriting model cannot keep up with the fluctuations. If the business is awarded a huge contract, or sales suddenly spike, its working capital needs can change overnight. Conversely, if a business recently lost its primary client, it can have the same impact but in the opposite direction. The standard bank review of the business’s previous year financial report, or even most its recent year to date reports, will not show this customer loss.  Not catching that major change during a credit review could result in either under or over funding a client in a volatile time in their business cycle. These situations often result in the client being moved into a workout group or requesting a forbearance from their lender.

This is where specialty finance or non-bank lenders can add tremendous value. Asset based lenders are largely not hampered by the rigidity of a regulated credit box that constrains the existing banking system. Instead, non-bank lenders are able to take a holistic view of the credit and fully understand a business from the bottom up. In other words, they will be watching the road ahead, as the owner is looking to climb to the top of the mountain or avoid a cliff. By focusing on the today and tomorrow, non-bank lenders are nimble enough to meet the client’s changing needs. This methodology allowsalternative lenders to support their clients through a turnaround situation and to help them grow their business.

By this added flexibility and taking on the added risk, these lenders typically charge rates that are marginally higher than the conventional bank lenders. However, in most cases these higher costs are temporary. The added flexibility offered by non-bank asset based lenders allows borrowers to recover before returning to a smooth road and loans from traditional lending institution if preferred.

Asset based lenders are a vital component of the commercial finance world. They will work with companies when conventional lenders are not able to meet their needs as well as partner with banks to create non-competitive solutions for their current clients. With this “team driving” approach we can all work to make an entrepreneur’s dream come true, while creating additional or retaining existing jobs that are so needed in times like today.

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